2007 Chapter 9-1

2007 Chapter 9-1 - Depreciation Civi 322 Chapter 9 1...

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1 Depreciation Civi 322 Chapter 9
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2 Depreciation is defined as the loss in service value over time. Thus from a physical standpoint it can be associated with physical deterioration and obsolescence. In addition, the loss in service value could be based upon remaining useful life in terms of number of units left to be produced. This technique would recognize that the economic life of an asset is less than the physical life. We normally think in terms of depreciation from the accounting standpoint which is the systematic allocation of the cost of an asset (less its salvage value) over its useful life.
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3 The key point to remember about depreciation from an economic analysis standpoint is that you must separate book depreciation (accounting depreciation from tax depreciation). Our object in economic analysis is to get to the cash flow stream. Only tax depreciation causes cash flow. Some items such as land are considered by accountants to be non-depreciable. Both book and tax depreciation are based upon historical cost accounting or original cost accounting.
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4 Book value is the remaining unallocated cost of an asset or: Book Value = Historical Cost - Accumulated Depreciation Cost Basis = Historical Cost (includes freight, labor, site preparation)
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5 Depreciation Methods A. Straight line B. Sum of years digits C. Declining balance D. Unit of production
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6 A. Straight Line Depreciation Annual Depreciation = Historical Cost - Salvage Value Useful Life Most often used in book depreciation where the
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This note was uploaded on 03/11/2010 for the course CEVE 322 taught by Professor Segner during the Spring '10 term at Rice.

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2007 Chapter 9-1 - Depreciation Civi 322 Chapter 9 1...

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